 "Defence stocks trade firm in weak market; BDL, HAL, GRSE rally up to 6%")
Shares of defence companies are trading higher by up to 6 per cent on the BSE in Friday’s intra-day trade in an otherwise weak market on expectations of ordering flow to rise sharply in the January-March quarter (Q4FY25) for the sector given that defence capex is set to be met in fiscal 2025 (FY25). The recent Defence Acquisition Council (DAC) approvals augur well for the sector and emphasize the government’s focus on defence indigenisation, according to analysts.
Bharat Dynamics (BDL), Cochin Shipyard, Hindustan Aeronautics (HAL), Garden Reach Shipbuilders & Engineers (GRSE), Data Patterns (India), Bharat Electronics (BEL) and Mazagon Dock Shipbuilders are trading higher between 2 per cent and 6 per cent. In comparison, the BSE Sensex was down 0.40 per cent at 76,731 at 12:40 PM.
Indigenisation, a primary theme for India’s defence story, continues as domestic capex allocation as a percentage of the total defence capex is pegged at 75 per cent in FY25BE or Rs 1.05 trillion, the highest level ever (versus 74 per cent share in FY24BE and 50 per cent share in FY20).
According to analysts at Elara Capital, the allocation to domestic companies stands at 75 per cent of the total budgeted defence capex, with the Navy’s budget up 18 per cent YoY in FY25BE. Also, engine woes for HAL may end soon as General Electric (GE) will supply F-404 engines in March. Inflows for HAL may jump by Rs 1.2 trillion in FY26E. The cumulative acceptance of necessity (AoN) in the past 2.75 years (at Rs 8.3 trillion) has exceeded the past decade's Rs 5.4 trillion figure for FY13-22 by a sharp 53 per cent. So, expect a multifold jump in contract awarding in the next 2-3 years, the brokerage firm said in a defence sector update.
According to Motilal Oswal Financial Services (MOFSL), the defence budget has seen a year-on-year (YoY) growth in absolute terms over the years, and capital allocation usually forms a third of the total defence budget.
However, in the past few years, post-Covid, budget allocation for defence as a percentage of GDP has declined and has been hovering around 1.5-1.6 per cent. To achieve a target defence turnover of $25 billion, it is essential to increase defence spending to 1.8-2.0 per cent of GDP. In the Union Budget, the brokerage firm said it will keenly monitor the allocation for the defence sector and will seek a more expedited finalisation of large platform orders from the Ministry of Defence (MoD).
MOFSL said they continue to remain positive on BEL given its market leadership in defence electronics and its ability to benefit from defence indigenisation. Moreover, the upcoming large defence platform orders (QRSAM, MRSAM, Tejas Mk1A, naval platforms, etc.), coupled with a strong order book of Rs 74,600 crore as of Q2FY25-end, provide a healthy visibility on revenue, stable margins and control over working capital, and healthy return ratios. The brokerage firm reiterated its 'Buy' rating on BEL with a target price of Rs 360 per share.
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However, a slowdown in order inflows from the defence and non-defence segments, intensified competition, further delays in the finalisation of large tenders, a sharp rise in commodity prices, and delays in payments from the MoD can adversely impact estimates on revenue, margins, and cash flows, analysts said.
Among the individual stocks, BDL is the top gainer, with its stock price rising 6 per cent to Rs 1,277 in intra-day trade so far. In two days, it has rallied 13 per cent after the MoD signed a contract with the company for the supply of Medium-Range Surface-to-Air Missiles (MRSAM) for the Indian Navy at a cost of approximately Rs 2,960 crore.
The MRSAM system is a standard fit, onboard multiple Indian Naval Ships and is planned to be fitted on the majority of the future platforms planned for acquisition. The contract marks a critical milestone in the ongoing efforts to bolster India’s defence capabilities and indigenise advanced military technology.
With this contract, the total order intake during YTDFY25 is approximately Rs 3,110 crore (vs Rs 1,793 crore in FY24). Order backlog, estimated to be at around Rs 21,000 crore (9.5x TTM revenue), gives a healthy revenue visibility. Order pipeline also remains strong in missiles, torpedoes, sonobuoys, countermeasure dispensing systems, etc. Orders execution will be the key thing to watch out for in the coming period as the execution has been impacted in the last two quarters (H1 revenue was down 19 per cent YoY) due to supply chain issues, ICICI Securities said.